What the markets want
Here’s why the market reaction was underwhelming:
The unemployment rate drop to 7.7 percent along with 236,000 new jobs renewed chatter that the Federal Reserve might call an early end to its liquidity party and what that would mean for the five-year bull market run.
So instead of a major rally, Wall Street saw tepid buying, likely held back by the guessing game of how much longer the central bank will keep printing money if the economy continues showing improvement.
The markets want a big jobs number, but without much of a fall in the headline unemployment rate. Instead they’d like to see people coming back into the labor force. Why? Because the big jobs number means a growing economy, and the longer unemployment stays above 6.5% the longer the Fed refrains from further tightening.
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8. March 2013 at 13:32
Other contributing factors might be that the numbers were not far from the numbers the market expected (we only know what people say they expect, not what market participants really expect) and that a single data point can be noise.
Not to say that expectations of Fed policy don’t have a substantial effect.
8. March 2013 at 14:19
“Don´t woory, be happy”. What´s happening is exactly what the Fed contracted for!
http://thefaintofheart.wordpress.com/2013/03/08/employment-report-the-one-graph-version/
8. March 2013 at 14:58
Great point, Prof. Sumner!
8. March 2013 at 15:17
Speaking of underwhelming;
‘Alan Krueger, chairman of the White House Council of Economic Advisers, said: “While more work remains to be done, today’s employment report provides evidence that the recovery that began in mid-2009 is gaining traction.”‘
After four years that’s all you’ve got?
8. March 2013 at 15:20
Dr. Sumner:
“The markets want a big jobs number, but without much of a fall in the headline unemployment rate. Instead they’d like to see people coming back into the labor force. Why? Because the big jobs number means a growing economy, and the longer unemployment stays above 6.5% the longer the Fed refrains from further tightening.”
This is quite a revealing comment.
If “the markets” want unemployment to stay above 6.5%, on the basis that the Fed will therefore not reduce its inflation, then this means that inflation on the one hand, and lower unemployment and higher economic growth on the other, are two mutually exclusive goals from the perspective of “the markets”, and not only that, but “the markets” allegedly prefer more inflation over lower unemployment and higher economic growth.
This can only mean that “the markets” is meant to refer to a particular group of people whose interests are furthered with more monetary inflation and lower real growth, as compared to less monetary inflation and higher real growth, if those were the choices.
Who is this particular group of people, and why are their interests served with more inflation, rather than lower unemployment and higher economic growth?
8. March 2013 at 15:28
If I’m not mistaken, what Scott Sumner means is that financial markets prefer robust NGDP growth, not inflation. The markets want tight labor markets and wage growth, not a declining unemployment number resulting from a reduction in the labor force.
8. March 2013 at 15:37
Think this qualifies as reasoning from a price change. Trying to read anything into short term market movements is no more accurate than reading tea leaves. You could just as easily say that markets began to anticipate good employment numbers earlier this week, hence the rallies earlier in the week, and that today’s reaction was muted because it was already priced in. You could also theorize that the increasingly bellicose rhetoric out of North Korea increased fear of a new conflict and offset the good employment numbers. Or maybe increased sunspot activity disrupted the aliens that actually run everything behind the scenes.
8. March 2013 at 15:51
Isn’t this reasoning from a price change? Do you have some secret knowledge about what the market was expecting to find out today? Can you call a one week 22 bp move in the 10 year treasury rate underwhelming?
8. March 2013 at 15:52
Suppose the Fed were to addopt the the Sumner 5% NGDPLT.
Would you expect the stock market to react to most economic news? Real GDP growth, employment, etc.? There may be some change in the composition of the growth, and there would be winners and losers, but the averages shouldn’t change much. In fact, I think the stock market would genneraly sell off on good news and rally on bad news, knowing the feds reaction fuction and the affect on base money and rates.
8. March 2013 at 16:48
foosion, That’s right.
Tyler and Kebko, I may be wrong, but it’s not reasoning from a price change. Reasoning from a price change is when you say “the price went up, therefore we can expect such and such to happen to quantity.”
I’m not trying to make any inferences about what will happen to the economy based on this price change, just trying to figure out why the reaction might be less than one would expect from the employment number alone.
Doug, Under 5% NGDPLT I’d expect the market to mostly react to supply-side news, not demand-side news.
8. March 2013 at 18:42
One segment of “the market”, the interbank currency market was anything but underwhelming this morning ! At precisely 8:31 am both the EUR/USD and GBP/USD stepped onto a fast moving down elevator. I consider the currency market home turf to some of the brightest minds and the deepest pockets in “the market”.
I will quote Fats Waller here….” One never knows, do one?” Not even the Ray Dalios of this world.
8. March 2013 at 19:02
Doug, Under 5% NGDPLT I’d expect the market to mostly react to supply-side news, not demand-side news.
That’s interesting, it implies we’ll know monetary policy is more on track when the stock market decouples from Fed policy.
In fact, since stocks are (roughly) the NPV of expected future profits, one might also view that as evidence that policy is too tight — the market is saying “Hey, we found some growth!”
8. March 2013 at 19:43
To play Devil’s Advocate, one should keep in mind that the market might be paying heed to the ADP number, which came out on Wednesday, and is probably more accurate than the first BLS print. If ADP had the market expecting about 200k jobs, then the BLS print shouldn’t have turned heads. Also, wholesale inventories were disappointing and weighed on the market after 10 am.
8. March 2013 at 19:55
What do people think of this:
Money supply targeting is superior to NGDP/inflation targeting.
Reason by example: Suppose there is a large drop in spending from market actors.
NGDP/inflation targeting implication: The government must grow its spending.
Money supply targeting implication: The government remains what it was, because despite the fact that markets have reduced their spending, they still own money, and so the government does not grow.
8. March 2013 at 20:25
ssumner said:
“… the longer unemployment stays above 6.5% the longer the Fed refrains from further tightening.”
Yes, but with this additional distinction: most pundits suggest the Fed will quit QE well before 6.5% unemployment (maybe around 7%). The 6.5% unemployment rate “trigger” is actually when the Fed might raise the fed funds target rate.
So, the market expects effective Fed “tightening” before 6.5%.
8. March 2013 at 21:00
Hi Folks,
I imagine many of you are familiar with Singapore’s health care plan. The population there uses Health Savings Accounts, right?
What happens when a citizen runs down his HSA to $0? Is he S.O.L.?
8. March 2013 at 21:27
Dear Blog Commenters,
Quick question. I’m aware of the “Sumner critique.” But is there ANY conceivable scenario where Prof. Sumner believes an increase in government spending could have a substantial impact on U.S. aggregate demand? If so, what kind of scenario(s)?
8. March 2013 at 22:02
TravisV,
HSAs are 1/3rd of the Singaporean healthcare system (which consists of the so-called 3Ms: Medisave, Medishield, and Medifund):
* Medisave is an HSA
* Medishield is catastrophic insurance covering most Singaporeans (though it is not universal)
* Medifund is a special endowment to cover additional costs not covered by the other two (how it works seems to be a bit opaque and rather at the bureaucracy’s discretion, but the intent is to cover the costs for those who truly cannot pay)
An overview here: http://www.healthxchange.com.sg/healthyliving/SpecialFocus/Pages/Understanding-Medisave-MediShield-Medifund.aspx
8. March 2013 at 22:04
Also, this blog on Singaporean healthcare may be useful: http://jeremyfylim.wordpress.com/
8. March 2013 at 23:10
Excellent blogging. I think this is right. Wall Street and the economy would like QE forever.
With inflation becoming deflation in the last nine months, the question may be, “Why would we ever stop QE?”
9. March 2013 at 00:27
Geoff –
“NGDP/inflation targeting implication: The government must grow its spending.”
I disagree. In your example, imagine a government that spends 0.1% of GDP, or $16 Billion out of a $16 Trillion economy. There is a sudden 50% drop in GDP. The Monetary Authority can simply devalue the dollar by 50% and the government can continue to spend $16 Billion.
It might be easier to understand by using Irving Fisher’s compensated dollar plan, but with NGDP instead of CPI. Let’s say the official price of gold was $20 per ounce in 1929. Then in 1933, after the 50% NGDP drop, the government changes the price to $40 and announces the price will change up or down by the percentage change in GDP every year, so NGDP will stay close to constant. There would be no need for government to grow by even one penny.
Now remove gold from the equation and use NGDP futures, and you’re pretty close to market monetarism.
9. March 2013 at 00:35
TravisV
“Dear Blog Commenters,
Quick question. I’m aware of the “Sumner critique.” But is there ANY conceivable scenario where Prof. Sumner believes an increase in government spending could have a substantial impact on U.S. aggregate demand? If so, what kind of scenario(s)?”
I’ll let Scott speak for himself, but I can imagine a scenario where the Fed has bought all the Federal, State and Local Debt as well as all government backed loans; and is already running a surplus; and is having trouble finding safe assets to buy, such as loans to private individuals or companies including banks. Then perhaps you could have the government engage in additional spending (or a tax cut). I don’t know if that scenario falls under the category of “conceivable”. I’d say it is extremely unlikely.
9. March 2013 at 06:16
Travis, I can think of numerous scenarios where more government spending might boost NGDP, or RGDP (which are different issues.) WWII spending raised both types of GDP.
Regarding other comments, I agree that other interpretations of the market response are plausible.
9. March 2013 at 06:18
Sumner thinks tax cuts are preferable to moarspending! on the fiscal stimulus side.
9. March 2013 at 06:20
Geoff,
NGDPLT ends any call from economists that fiscal = growth.
9. March 2013 at 18:30
The market moves look like a solid endorsement of qe3. It took the economy out of the David Glasner world where falling inflation expectations trigger spending shocks and restored normalcy, asset prices depend on expected growth and inflation. The foreign exchange and treasury markets immediately recognized that the message from the jobs report was stronger growth; impact moves in these markets persisted throughout the sesssion. Stock market investors initially saw the jobs report as signaling higher inflation and stocks sold off. They rallied when investors’ views converged with the view in the other markets.
We’re already in the sumner world where markets ignore demand side news and react to supply side news.
10. March 2013 at 07:44
Tim, I wish, but I think that world is still a few years away.
10. March 2013 at 09:24
Negation of Ideology:
“NGDP/inflation targeting implication: The government must grow its spending.”
“I disagree. In your example, imagine a government that spends 0.1% of GDP, or $16 Billion out of a $16 Trillion economy. There is a sudden 50% drop in GDP. The Monetary Authority can simply devalue the dollar by 50% and the government can continue to spend $16 Billion.”
Devaluation only has meaning if it is manifested in trading.
If market participants reduce their spending, if that’s the context, then the government is going to have to increase its spending, if NGDP is going to not be reduced.
You can’t assume a rise in market actor spending when the context is a fall in market actor spending!
“Now remove gold from the equation and use NGDP futures, and you’re pretty close to market monetarism.”
This also assumes a rise in market participant spending. I am talking about a fall in market actor spending.
Morgan:
“NGDPLT ends any call from economists that fiscal = growth.”
Only for those who believe “inflation = growth”. Others reject both views.